QBE Lenders Mortgage Insurance

Question

Hi Graham, Is there any way to estimate how much will property prices "pop" will cost QBE? What is the risk/reward payoff for this business? Thanks, Ganesh

Answer

Hi Ganesh,

First let me say I can only offer general advice so please take your personal situation into account before acting on our recommendations. Having said that, QBE's LMI division insures around $250bn of mortgages, which typically have loan-to-value ratios of 80% or higher. It's a bit of a black box so I'll have to just throw around some back-of-the-envelope calculations. If we assume all $250bn has a loan-to-value ratio of 80%, that would get us to $312bn worth of houses. If we assume prices drop 30%, as they did in the US, we end up with $218bn worth of houses. So there are $250bn in loans and $218bn in houses, meaning a potential shortfall of $32bn. QBE currently has $11bn in equity on its balance sheet, meaning it wouldn't have the capital to pay the banks. Of course the risk that every mortgage defaults is not 100%, even if the house value falls below the loan value. There are many other factors that play into this and I'm certainly not going to make any predicitions of how Australian housing will play out, nor do I know the intricacies of QBE's LMI division or whether it has offloaded some of the risk via reinsurance. But the conclusion is the same - QBE is insuring high risk mortgages in an environment of elevated house prices. If prices go 'pop', expect a lot of red.

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Graham Witcomb

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